Wednesday, November 14, 2007

Renters and property taxes

Despite the close call, Simple Majority looks like it will pass, which is a HUGE relief to those of us who care about public schools and can see the dramatic positive effect this will have on state education funding. But if you're a renter, particularly someone without children or perhaps living on a fixed income, you might be worried that the flood of new school funding will come at your expense. Won't the new school levies cause your rent to rise?

The answer is no. Rents are set purely by supply and demand; property taxes are paid entirely by the owners. In fact, property tax is one of the few, truly progressive taxes, and one of the areas where our democracy works directly in favor of the little guy. Now, thanks to Simple Majority, renters (who are typically lower income) get exactly the same vote as the property owners (who are generally wealthier), but (here's the critical part) renters don't have to pay. Unlike, say, an income tax, a property tax under a simple majority is the perfect progressive tax because the people who pay for it (owners) can't manipulate the political process to give themselves tax loopholes at the expense of the people who don't pay (renters).

Most other states with property taxes require a super-majority for exactly that reason--to make it harder for the one group who doesn't pay (renters, who tend to be a majority) to raise taxes on those who do (owners, who tend to be in the minority).

Still skeptical? Here's the proof:

Consider two adjacent rental complexes, identical in every way except that one is located in City A directly across the city line from the other in City B. Assume that each complex has 100 units, owned by a single owner who is the only property owner in the city. There are a total of 100 renters, 50 of whom live in A and 50 in B. In other words, assume that each rental complex is half-full. The rent for each unit is $1,000.

The people in City A, concerned about their school system, vote to fund a $10,000 school levy to be paid by property taxes. City B does not pass its levy.

Question: What, if anything, will happen to rents in City A? Answer: nothing. Rents will remain exactly where they were before the levy. The entire cost of the levy will be absorbed by the single landowner.

Reason: Suppose the landowner decides to raise rents to pay for the additional taxes. To do so, he would have to raise the rent by $10,000 / 50 = $200.00, for a new total rent of $1,200 per occupant. Since the rental unit in City A is identical to those in City B, each occupant in A will move to City B rather than pay the additional rent. Note that the city still receives its levy funds regardless of how many renters remain, since the landowner -- not the renters -- ultimately pays the tax.

Yes, this is a simplified example and the real world is much more complicated (no two cities are every "exactly alike", and people might prefer to live in City A in spite of the higher rents because the schools are better, for example). But the point of this proof is show that all other things being equal, rents are set by the market, not by taxes, and therefore property taxes help renters at no cost.

No comments: